The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: State Boom Normal Economy Recession Dividend $5 $2 0 Stock Price $195 $100 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Question 1
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the
following payoffs to investors next year:
State
Boom
Normal Economy
Recession
Dividend
$5
$2
0
Stock Price
$195
$100
0
The company goes out of business if a recession hits. Calculate the expected rate of return
and standard deviation of return to Leaning Tower of Pita shareholders. Assume for
simplicity that the three possible states of the economy are equally likely. The stock is selling
today for $90.
Note 1: The formulas for computing an expectation and a standard deviation of a random
variable can be found in Appendix 3 of Lecture 3.
Note 2: A return on a stock is defined as follows. Consider buying a stock at time 0 at price
Po and holding it between years 0 and 1. Next year's price is P, and next year's dividend is
D₁. Your return is
R=D₁ + (P₁-P₁)
P₁
Transcribed Image Text:Question 1 The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: State Boom Normal Economy Recession Dividend $5 $2 0 Stock Price $195 $100 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $90. Note 1: The formulas for computing an expectation and a standard deviation of a random variable can be found in Appendix 3 of Lecture 3. Note 2: A return on a stock is defined as follows. Consider buying a stock at time 0 at price Po and holding it between years 0 and 1. Next year's price is P, and next year's dividend is D₁. Your return is R=D₁ + (P₁-P₁) P₁
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